WASHINGTON, D.C.
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 1-9371
ALLEGHANY CORPORATION
---------------------
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
DELAWARE
--------
STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION
51-0283071
----------
INTERNAL REVENUE SERVICE EMPLOYER IDENTIFICATION NUMBER
375 PARK AVENUE, NEW YORK, NEW YORK 10152
-----------------------------------------
ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE
212 / 752-1356
--------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
NOT APPLICABLE
--------------
FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT
THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS:
YES X NO
--------- ---------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASS OF
COMMON STOCK, AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT:
7,256,667
---------
(AS OF SEPTEMBER 30, 1997)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(dollars in thousands, except share and per share amounts)
(unaudited)
1997 1996
--------------------
Revenues
Title premiums, escrow and trust fees $373,148 $342,873
Net reinsurance premiums earned 95,658 91,273
Interest, dividend and other income 53,879 51,799
Net mineral and filtration sales 53,129 51,833
Net gain on investment transactions 112 950
--------------------
Total revenues 575,926 538,728
--------------------
Costs and expenses
Agents' commissions and brokerage expense 149,797 149,834
Salaries, administrative, selling and other expenses 236,159 219,539
Provisions for title losses and other claims 26,465 24,632
Property and casualty losses and loss adjustment
expenses 70,405 67,271
Cost of mineral and filtration sales 33,356 33,328
Interest expense 9,836 9,370
Corporate administration 5,817 4,608
--------------------
Total costs and expenses 531,835 508,582
--------------------
Earnings before income taxes 44,091 30,146
Income taxes 14,079 10,242
--------------------
Net earnings $30,012 $19,904
====================
Earnings per share of common stock $4.13 $2.71
====================
Dividends per share of common stock * *
====================
Average number of outstanding shares of common stock ** 7,257,379 7,355,084
====================
* In March 1996 and 1997, Alleghany declared a dividend consisting of one
share of Alleghany common stock for every fifty shares outstanding.
** Adjusted to reflect common stock dividends declared in March 1997.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(dollars in thousands, except share and per share amounts)
(unaudited)
1997 1996
----------------------
Revenues
Title premiums, escrow and trust fees $1,038,224 $966,603
Net reinsurance premiums earned 280,200 269,023
Interest, dividend and other income 158,301 143,422
Net mineral and filtration sales 153,357 150,666
Net (loss) gain on investment transactions (925) 2,150
----------------------
Total revenues 1,629,157 1,531,864
----------------------
Costs and expenses
Agents' commissions and brokerage expense 432,744 420,853
Salaries, administrative, selling and other
expenses 667,315 628,617
Provisions for title losses and other claims 72,621 62,340
Property and casualty losses and loss adjustment
expenses 200,541 195,840
Cost of mineral and filtration sales 100,818 99,049
Interest expense 27,714 22,262
Corporate administration 15,515 13,907
----------------------
Total costs and expenses 1,517,268 1,442,868
----------------------
Earnings before income taxes 111,889 88,996
Income taxes 35,030 29,483
----------------------
Net earnings $76,859 $59,513
======================
Earnings per share of common stock $10.57 $8.10
======================
Dividends per share of common stock * *
======================
Average number of outstanding shares of common stock ** 7,267,786 7,352,901
======================
* In March 1996 and 1997, Alleghany declared a dividend consisting of one
share of Alleghany common stock for every fifty shares outstanding.
** Adjusted to reflect common stock dividends declared in March 1997.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(dollars in thousands, except share and per share amounts)
September
30, 1997 December
(Unaudited) 31, 1996
-------------------------
Assets
Available for sale securities:
Fixed maturities:
U.S. Government, government agency
and municipal obligations (amortized cost $1,292,622) $1,312,619 $1,243,148
Certificates of deposit and
commercial paper (amortized cost 133,208) 133,208 160,029
Bonds, notes and other (amortized cost 676,490) 682,902 596,072
Equity securities (cost 397,316) 873,741 714,868
------------------------
3,002,470 2,714,117
Cash 58,060 59,954
Cash pledged to secure trust and escrow deposits 191,303 118,066
Notes receivable 91,536 91,536
Funds held, accounts and other receivables 330,125 285,895
Title records and indexes 152,596 152,291
Property and equipment - at cost, less accumulated depreciation
and amortization 286,920 287,177
Reinsurance receivable 395,301 392,210
Other assets 391,664 399,377
-------------------------
$4,899,975 $4,500,623
=========================
Liabilities and Common Stockholders' Equity
Title losses and other claims $551,150 $533,738
Property and casualty losses and loss adjustment expenses 1,164,554 1,110,020
Other liabilities 655,201 569,599
Long-term debt of parent company 44,000 0
Long-term debt of subsidiaries 425,595 447,525
Net deferred tax liability 61,985 38,941
Trust and escrow deposits secured by pledged assets 457,839 377,540
-------------------------
Total liabilities 3,360,324 3,077,363
Common stockholders' equity 1,539,651 1,423,260
-------------------------
$4,899,975 $4,500,623
=========================
Shares of common stock outstanding 7,256,667 7,386,332*
=========================
Common stockholders' equity per share $212.17 $192.69*
=========================
* Adjusted to reflect the common stock dividend declared in March 1997.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
(dollars in thousands)
(unaudited)
1997 1996
-------------------
Cash flows from operating activities
Net earnings $76,859 $59,513
Adjustments to reconcile net earnings to cash
provided by (used in) operations:
Depreciation and amortization 41,434 36,855
Net loss (gain) on investment transactions 925 (2,150)
Other charges, net (12,485) (3,346)
Increase in funds held, accounts and other receivables (44,230) (44,508)
Increase in reinsurance receivable (3,091) (4,916)
Increase in title losses and other claims 17,412 377
Increase in property and casualty loss and loss
adjustment expenses 54,534 98,364
Increase in other assets (3,570) (24,736)
Increase in other liabilities 85,601 53,316
Increase in cash pledged to secure trust and escrow
deposits (73,237) (42,104)
Increase in trust and escrow deposits 80,299 27,666
-------------------
Net adjustments 143,592 94,818
-------------------
Cash provided by operations 220,451 154,331
-------------------
Cash flows from investing activities
Purchase of investments (751,290) (572,716)
Maturities of investments 171,493 156,866
Sales of investments 395,574 153,256
Purchases of property and equipment (33,250) (41,777)
Other, net 2,789 2,232
-------------------
Net cash used in investing activities (214,684) (302,139)
-------------------
Cash flows from financing activities
Principal payments on long-term debt (23,666) (139,561)
Proceeds of long-term debt 45,578 295,419
Other, net (29,573) (16,301)
-------------------
Net cash (used in) provided by financing activities (7,661) 139,557
-------------------
Net decrease in cash (1,894) (8,251)
Cash at beginning of period 59,954 55,175
-------------------
Cash at end of period $58,060 $46,924
===================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $23,939 $17,540
Income taxes $26,581 $50,807
Notes to the Consolidated Financial Statements
This report should be read in conjunction with the Annual Report on
Form 10-K for the year ended December 31, 1996, and the Quarterly Report on Form
10-Q for the quarters ended March 31, 1997 and June 30, 1997 of Alleghany
Corporation (the "Company").
The information included in this report is unaudited but reflects all
adjustments which, in the opinion of management, are necessary to a fair
statement of the results of the interim periods covered thereby. All adjustments
are of a normal and recurring nature except as described herein.
Contingencies
The Company's subsidiaries and division are parties to pending claims
and litigation in the ordinary course of their businesses. Each such operating
unit makes provisions on its books in accordance with generally accepted
accounting principles for estimated losses to be incurred as a result of such
claims and litigation, including related legal costs. In the opinion of
management, such provisions are adequate as of September 30, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The Company reported net earnings of $30.0 million in the third quarter
of 1997, compared with $19.9 million in the third quarter of 1996, and $76.9
million in the first nine months of 1997, compared with $59.5 million in the
first nine months of 1996.
Net losses on investment transactions after taxes in the first nine
months of 1997 totalled $601 thousand, compared with net gains of $1.4 million
in the first nine months of 1996.
Chicago Title and Trust Company ("CT&T") contributed pre-tax earnings
of $30.2 million on revenues of $391.3 million in the 1997 third quarter,
compared with $17.8 million on revenues of $358.3 million in the third quarter
of 1996. In the first nine months of 1997, CT&T contributed pre-tax earnings of
$72.6 million on revenues of $1,088.3 million, compared with $57.0 million on
revenues of $1,013.2 million in the first nine months of 1996.
CT&T's results in the third quarter and first nine months of 1997
reflect strong activity in commercial real estate markets and increased escrow
and title search information sales revenue. 1996 nine-month results included a
$4.2 million pre-tax charge to write down the carrying value of title plants and
goodwill in connection with the implementation of Financial Accounting Standards
Board Statement No. 121, and pre-tax income of $8.0 million in respect of a
reduction in title claims reserves.
CT&T's results also reflect an increase in the contribution of its
financial services businesses conducted through Alleghany Asset Management, Inc.
and its subsidiaries ("Alleghany Asset Management"). Alleghany Asset Management
contributed pre-tax earnings to CT&T of $6.6 million in the 1997 third quarter,
an increase of 94 percent over the 1996 third quarter contribution of $3.4
million, and $17.2 million in the first nine months of 1997, an increase of 81
percent over the contribution of $9.5 million in the first nine months of 1996.
The improved results of Alleghany Asset Management are primarily due to an
increase in assets under management. As of September 30, 1997, Alleghany Asset
Management managed $21.3 billion in assets, compared with $13.4 billion as of
September 30, 1996.
Underwriters Re Group, Inc. ("Underwriters Re Group") contributed
pre-tax earnings of $9.8 million on revenues of $115.1 million in the third
quarter of 1997, compared with $8.9 million on revenues of $109.8 million in the
third quarter of 1996, and $31.7 million on revenues of $337.6 million in the
first nine months of 1997, compared with $23.9 million on revenues of $315.6
million in the first nine months of 1996.
The results of Underwriters Re Group for the third quarter and first
nine months of 1997 reflect flat reinsurance premium levels due to a highly
competitive and soft reinsurance market, an absence of significant catastrophe
losses and an absence of adverse reserve activity. Net written premiums for the
third quarter of 1997 were $99.0 million compared with $92.3 million in the
prior year third quarter, and $310.4 million for the first nine months of 1997
compared with $298.2 million in the prior year first nine months. 1996 third
quarter results also reflected a pre-tax gain of $1.0 million on the sale of an
equity investment.
World Minerals Inc. ("World Minerals") contributed pre-tax earnings of
$8.3 million on revenues of $53.0 million in the 1997 third quarter, compared
with $4.2 million on revenues of $52.1 million in the third quarter of 1996. In
the first nine months of 1997, World Minerals contributed pre-tax earnings of
$18.2 million on revenues of $152.8 million, compared with $14.3 million on
revenues of $151.0 million in the first nine months of 1996.
World Minerals' revenues and pre-tax earnings increased in the 1997
third quarter from the prior year period due to a more profitable product mix
sold by the World Minerals' North American diatomite plants, and higher export
volume in its Latin American diatomite plants without a commensurate increase in
operating costs. 1997 nine-month results reflect the improved results from
diatomite operations offset by continuing high start-up costs related to World
Minerals' Chinese joint ventures and the continued strength of the dollar which
lowered the results of foreign operations. 1996 third quarter and nine-month
results included a charge related to the purchase of minority interests in one
of World Minerals' businesses.
As of September 30, 1997, the Company beneficially owned approximately
7.43 million shares, or 4.8 percent, of the outstanding common stock of
Burlington Northern Santa Fe Corporation which had an aggregate market value on
that date of approximately $718.1 million, or $96.625 per share, compared with a
market value on December 31, 1996 of $641.9 million, or $86.375 per share. The
aggregate cost of such shares is approximately $253.7 million, or $34.15 per
share.
The Company's results in the first nine months of 1997 are not
indicative of operating results in future periods. The Company and its
subsidiaries have adequate internally generated funds and unused credit
facilities to provide for the currently foreseeable needs of its and their
businesses.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities.
On October 3, 1997, Alleghany issued an aggregate of 82,573 shares of
Alleghany common stock to ten employees of Underwriters Re Group pursuant to an
offer by Alleghany to exchange 431,696 shares of common stock of Underwriters Re
Group (the "URG Shares") held by such employees, which represented 2.7 percent
of the outstanding common stock of Underwriters Re Group, for shares of
Alleghany common stock at an exchange rate of .191264368 share of Alleghany
common stock for each URG Share (rounded up to the nearest whole share of
Alleghany common stock). Alleghany now owns all of the issued and outstanding
URG Shares. The exchange was exempt from registration under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof, as
a transaction not involving a public offering.
On October 3, 1997, Underwriters Re Group granted options to purchase
an aggregate of 202,102 shares of Alleghany common stock for an average exercise
price of $132.44 per share (the "New Options") to sixteen employees and former
employees of Underwriters Re Group pursuant to an offer by Underwriters Re Group
to exchange options to acquire an aggregate of 1,056,522 shares of common stock
of Underwriters Re Group held by such persons (the "Old Options") for New
Options, at the exchange rate set forth above. One-quarter of each New Option
becomes exercisable on each of the first, second, third and fourth anniversaries
of the date of grant of the Old Option which it replaced. A New Option is
forfeited to the extent not exercisable upon termination of the optionee's
employment with Underwriters Re Group or a subsidiary. The grant of the New
Options was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof, as a transaction not involving a public offering. The
shares of Alleghany common stock issuable upon the exercise of the New Options
have been registered on Alleghany's Registration Statement on Form S-8
(Registration No. 333-37237).
The above does not include unregistered issuances of the Company's
common stock that did not involve a sale consisting of issuances of common stock
and other securities pursuant to employee incentive plans.
ITEM 5. OTHER INFORMATION.
On August 14, 1990, the Company transferred a $91.5 million installment
note issued by Merrill Lynch, Pierce, Fenner & Smith Incorporated, the maturity
of which was extended from 1994 to 1999 (the "Installment Note"), to Alleghany
Funding Corporation, a wholly owned subsidiary of the Company ("AFC"), in
exchange for the common stock of AFC. On that date, AFC issued secured notes due
1999 in the aggregate principal amount of $80 million ("1999 Notes").
On October 20, 1997, AFC redeemed the 1999 Notes with the proceeds from
the issuance by AFC on that date of secured notes due 2007 (the "2007 Notes") in
the aggregate principal amount of $80 million. The 2007 Notes are primarily
secured by (i) the Installment Note, the maturity of which was extended to 2007,
pursuant to an intercreditor and collateral agency agreement (the "Intercreditor
Agreement") among AFC, The Chase Manhattan Bank as collateral agent, and
Barclays Bank PLC as swap counterparty, and (ii) a master agreement and related
amended confirmation (collectively, the "Swap Agreement") between Barclays Bank
PLC as swap counterparty and AFC, pursuant to an indenture (the "Indenture")
between AFC and The Chase Manhattan Bank as trustee. The Swap Agreement provides
that AFC shall pay to Barclays Bank PLC a portion of the interest received on
the Installment Note, which is based on a commercial paper rate, and, in return,
Barclays Bank PLC shall pay to AFC an amount equal to the interest on the 2007
Notes, which is based on a LIBOR rate. The 2007 Notes were privately placed with
several institutions.
The foregoing summary description is qualified in its entirety by
reference to the Intercreditor Agreement, the Swap Agreement and the Indenture,
attached hereto as Exhibits 10.1 through 10.3, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number Description
-------------- -----------
10.1 Intercreditor and Collateral Agency Agreement
dated as of October 20, 1997 among The Chase
Manhattan Bank, Barclays Bank PLC and AFC.
10.2 Master Agreement dated as of October 20, 1997
between Barclays Bank PLC and AFC and related
Amended Confirmation dated October 24, 1997
between Barclays Bank PLC and AFC.
10.3 Indenture dated as of October 20, 1997 between AFC
and The Chase Manhattan Bank.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter of 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLEGHANY CORPORATION
---------------------
Registrant
Date: November 11, 1997 /s/ David B. Cuming
---------------------
David B. Cuming
Senior Vice President
(and principal financial
officer)
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.1 Intercreditor and Collateral Agency Agreement dated as of
October 20, 1997 among The Chase Manhattan Bank, Barclays
Bank PLC and AFC.
10.2 Master Agreement dated as of October 20, 1997 between
Barclays Bank PLC and AFC and related Amended Confirmation
dated October 24, 1997 between Barclays Bank PLC and AFC.
10.3 Indenture dated as of October 20, 1997 between AFC and The
Chase Manhattan Bank.
27 Financial Data Schedule.